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* IN THE HIGH COURT OF DELHI AT NEW DELHI
5
+ ITA 780/2014
COMMISSIONER OF INCOME TAX ­V ..... Appellant
Through: Mr. N. P. Sahni, Senior Standing
Counsel with Mr. Nitin Gulati, Advocate.
versus
RATHI GRAPHICS TECHNOLOGIES LTD. ..... Respondent
Through: Mr. Satyen Sethi, Advocate.
AND
6
+ ITA 785/2014
COMMISSIONER OF INCOME TAX ­V ..... Appellant
Through: Mr. N. P. Sahni, Senior Standing
Counsel with Mr. Nitin Gulati, Advocate.
versus
RATHI GRAPHICS TECHNOLOGIES LTD. ..... Respondent
Through: Mr. Satyen Sethi, Advocate.
CORAM:
HON'BLE DR. JUSTICE S. MURALIDHAR
HON'BLE MR. JUSTICE VIBHU BAKHRU
ORDER
% 06.08.2015
1. These appeals under Section 260A of the Income Tax Act, 1961 (,,Act)
by the Revenue is directed against an order dated 17th January 2014 passed
ITA Nos. 780 & 785 of 2014 Page 1 of 9
by the Income Tax Appellate Tribunal (,,ITAT) in ITA No.2894/Del/2011
and Cross Objection No. 60/Del/2013 relevant to the Assessment Year
(,,AY) 2002-03.
2. In respect of the Respondent/Assessee, a rehabilitation scheme was
sanctioned by the Board for Industrial and Financial Reconstruction
(,,BIFR) on 1st November 2002. The scheme that was sanctioned was in fact
prepared by the Industrial Development Bank of India (,,IDBI), one of the
major lenders of the Respondent. On the loans borrowed by the Assessee
from IDBI, there was outstanding interest as on 31st March 2001. It was
decided in a series of meetings that the IDBI could be allotted 14,30,000
equity shares of Rs.10 each valued at Rs.1.43 crores and the interest to the
extent would be taken as having been paid as on 31st March 2002.
3. For the previous year ended on 31st March 2002, relevant to AY 2002-03,
the Assessee filed a return on 31st October 2002 declaring a loss of
Rs.2,04,58,365. In computing the returned loss, the unpaid interest to the
IDBI of Rs.3,45,09,854 was added back to the net loss as per the Profit &
Loss Account. Thereafter, deduction of interest paid to IDBI to the extent of
Rs.1.43 crores was claimed. The basis for this claim was the allotment of
shares in the above manner to the IDBI. In the audited accounts for the year
ended 31st March 2002, the following note was appended under the notes on
accounts:
"IDBI has approved a negotiated settlement fo r the
company. As per the terms of the rehabilitation based on the
settlement, the company has issued 14,30,000 equity shares
of Rs.10/- each to IDBI towards 30% simple interest due as
on 31/03/2001. The interest outstanding as at 31/03/2002
ITA Nos. 780 & 785 of 2014 Page 2 of 9
has been reduced to that extent.The other relief of the
negotiated settlement would be accounted-for on the
approval of rehabilitation scheme by the BIFR."
4. Further in the computation of income for AY 2002-03, which was placed
before the Assessing Officer (,,AO), the Assessee appended the following
note in para 11:
"During the year, IDBI approved a negotiated settlement,
where-under IDBI against the outstanding interest due on
31.03.2001 accepted 14,30,000 equity shares of Rs.10/-
each valued at 1,43,00,000/-. The above shares were
accepted towards 30% simple interest due as on 31.03.2001.
Pursuant to above, outstanding interest as at 31.03.2001 has
been reduced to the interest of Rs.1,43,00,000/-. The above
payment of interest in kind had been added back by the
Assessee in earlier years. Since interest to the extent of
Rs.1,43,00,000/- has been paid in the relevant previous
years, therefore, the same has been claimed deduction
within the meaning of Section 43B of the Act. Various
Tribunals have held the words actual payment in Section
43B are to be liberally construed and would cover every
discharge of liability. The accrued interest for the
01.04.2001 to 31.03.2002 has been added back in the
computation of income [see note 2 (iii) (a)]."
5. It may be added here that the actual date of allotment of 14,30,000 shares
by the Respondent Assessee to the IDBI was 30 th March 2002. The issued,
subscribed, called up and paid up capital was increased correspondingly.
6. During the course of the original assessment proceedings, the AO by an
order dated 4th November 2004 raised a specific query regarding the shares
issued to the IDBI. By a letter dated 22nd November 2004, the Assessee
ITA Nos. 780 & 785 of 2014 Page 3 of 9
explained, inter alia, that pursuant to the settlement reached with the IDBI
which was confirmed by IDBI by letter dated 22nd January 2002 , the shares
as aforementioned were allotted. It was urged that the said allotment of
shares should be taken to be against the interest amount ,,actually paid
within the meaning of Section 43B of the Act. It was explained that by order
dated 1st November 2002 the BIFR was only approving the scheme already
prepared by IDBI and acted upon by the Assessee and IDBI.
7. It appears that after the assessment was completed under Section 143 (3)
of the Act on 30th November 2004, the case of the Respondent was re-
opened under Section 147 of the Act. This admittedly was done within four
years thereafter. The reasons for the reopening, as stated by the AO, was
that it was noticed that the Assessee had claimed and was allowed a
deduction of Rs.1.43 crores towards the allotment of shares to the IDBI on
conversion of 30% of the simple interest in equity share capital. It was noted
that since the rehabilitation scheme was sanctioned by the BIFR on 1 st
November 2002, the said deduction was not allowable during the AY 2002-
03.
8. The AO did not accept the contention of the Assessee that the IDBI had
already approved the proposal for conversion of a part of the interest into
shares by a letter dated 22nd January 2002. The AO was of the view that in
terms of Section 43B of the Act, deduction is allowable on actual payment
basis and allotment of equity shares in lieu of interest liability cannot be
construed as actually paid as required under Section 43 B of the Act.
Further the Form No.2 filed by the Assessee showed the date of allotment as
ITA Nos. 780 & 785 of 2014 Page 4 of 9
30th March 2002 which was "not clearly legible". Since the return of
allotment in Form No.2 was filed with the Registrar of Companies (,,ROC)
only on 29th April 2002, and was lying with the Assessee till that date, that
by itself was not sufficient to prove that the shares were in fact allotted to
IDBI on 30th March 2002. Consequently, the deduction of Rs.1.43 crores
was disallowed and added back to the income of the Assessee.
9. In the appeal filed by the Assessee, the CIT (Appeals) [,,CIT (A)] by
order dated 25th April 2011 held that the re-opening of the case under
Section 147 of the Act was valid. However, on merits the CIT (A) deleted
the addition. Aggrieved by the aforementioned order, the Revenue went in
appeal before the ITAT and the Assessee filed its cross objections.
10. In the impugned order dated 17th January 2014, the ITAT noted that the
only reason for the re-opening was that the rehabilitation scheme was
sanctioned by the BIFR on 1st November 2002 and, therefore, the deduction
was not allowable during AY 2002-03. After going through the facts and
examining the records, the ITAT noted that in the original assessment
proceedings itself the AO had raised a query which had been explained
satisfactorily by the Assessee and accepted by the AO. Therefore, "the
present case is not a change of statement of income and rather it is a case of
change of opinion."
11. Mr. N.P. Sahni, learned Senior Standing counsel appearing for the
Revenue, urged that this was not a case where the AO had examined an
issue and recorded satisfaction in the original assessment order. He referred
to Explanation 1 to Section 147 which states that "Production before the AO
ITA Nos. 780 & 785 of 2014 Page 5 of 9
of account books or other evidence from which material evidence could with
due diligence have been discovered by the AO will not necessarily amount
to disclosure." He further urged that the mere conversion of a portion of the
outstanding interest into share will not amount to actual payment of interest
and therefore qualify for deduction under Section 43 B of the Act. He
referred to Explanation 3C to Section 43B which declares that where a
deduction in respect of any amount being the interest payable has been
converted into a loan or borrowing it sh all "not to be deemed to have been
actually paid." He accordingly submitted that the AO was justified in
seeking to reopen the assessment. Mr. Sahni further submitted that if in fact
the conversion into shares took place only pursuant to the sanctioning of the
scheme by the BIFR on 1st November 2002, the deduction could in any
event not have been claimed in AY 2002-03.
12. Mr. Satyen Sethi, learned counsel appearing for the Assessee, has
produced before the Court the computation of income which was placed
before the AO. It contains the explanatory note extracted hereinbefore. He
submitted that the full facts of the case were already available with the AO
in the original assessment proceedings. This was a case of mere change of
opinion particularly since a specific query has been raised by the AO in
regard to conversion of a party of interest into shares. The Assessees
answer to the query was accepted by the AO and the assessment was
finalized accordingly.
13. Mr. Sethi further pointed out that Explanation 3C to Section 43 B of the
Act deals with the situation of conversion of interest into a loan or
ITA Nos. 780 & 785 of 2014 Page 6 of 9
borrowing. Explanation 3C to Section 43B of the Act was introduced
retrospectively with effect from 1st April 1989. There is no provision, much
less with retrospective effect, by which conversion of interest into shares has
been described as not amounting to actual payment for the purposes of
Section 43B of the Act.
14. Having heard the above submissions, the Court is satisfied that this was
indeed a case of mere change of opinion by the AO. As noticed
hereinbefore, a specific query was raised by the AO in the original
assessment proceedings itself as regards the conversion of a portion of the
interest into shares. The said query, as found in the order dated 4th
November 2004, reads as under:
"In the return, a deduction ofRs.1.43 Cr is claimed ­ share
capital issued to IDBI. When the money is with you, how
and on what basis the deduction has been claimed. -Give a
detailed note in regard to the claim of deduction ofRs.1.43
Cr in the computation of income. How the deduction has
been claimed under section 43B of the Act."
15. The Respondent Assessee replied to the above query on 29th
November 2004. In its reply the Respondent explained that the
allotment of shares was pursuant to the settlement arrived at with the
IDBI and the IDBI had agreed to the conversion of a portion of the
interest into shares by its letter dated 22nd January 2002. It was also
explained to the AO that the allotment of shares took place in fact on
30th March 2002. The mere fact that the return of allotment was filed
with the ROC only on 29th April 2002 or that the BIFR may have
ITA Nos. 780 & 785 of 2014 Page 7 of 9
sanctioned the scheme only on 1st November 2002, would not change
the actual date on which the shares stood allotted i.e. 30th March 2002.
16. When pursuant to a settlement the creditor agrees to convert a
portion of interest into shares, it must be treated as an extinguishment
of liability to pay interest to that extent. In essence there will be no
further outstanding interest to that extent. Consequently, the situation
where an interest payable on a loan is converted into shares in the
name of the lender/creditor is different from the situation envisaged in
Explanation 3C to Section 43B of the Act viz., conversion of interest
into "a loan or borrowing". In the latter instance, the liability
continues, although in a different form. However, where the interest or
a part thereof is converted into equity shares, the said interest amount
for which the conversion is taking place is no longer a liability.
17. The Court is of the view that the plea of the Assessee, which was
accepted by the CIT (A) and the ITAT, that the said conversion of a
portion of interest into shares should be taken to be "actual payment"
within the meaning of Section 43B of the Act, merits acceptance. In
any event, on the facts of the case discussed above, there was no
justification in seeking to reopen the assessment under Section 147 of
the Act on a mere change of opinion.
18. In that view of the matter, the Court finds no legal infirmity in the
impugned order of the ITAT. The Court declines to frame questions of
law as urged by the Revenue.
ITA Nos. 780 & 785 of 2014 Page 8 of 9
19. The appeals are dismissed.
S. MURALIDHAR, J
VIBHU BAKHRU, J
AUGUST 06, 2015/dn
ITA Nos. 780 & 785 of 2014 Page 9 of 9